Fed Proposes Varied Risk-based Supervisory Standards for Large Banks

The Federal Reserve issued its highly anticipated proposed framework for applying enhanced prudential standards to banking firms with $100 billion or more in assets, as required by S. 2155, the regulatory reform law.

The Fed proposed to establish four categories of standards that seek to reflect the risks of firms in the group. The agency outlined the risk-based indicators it would use to determine the applicability of standards, including size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets and off-balance sheet exposure. In addition, the Fed released a second joint proposal with the OCC and FDIC that would tailor requirements under the regulatory capital rule, the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio rule for banks in each group. The proposal does not apply to foreign banking organizations or intermediate holding companies of foreign banking organizations, but the Fed signaled it will issue a separate proposal in the weeks ahead on how it will supervise these institutions.

Under the proposed framework, most firms with assets between $100 billion and $250 billion in total assets would no longer be subject to standardized liquidity requirements or company-run stress tests, and would be subject to supervisory stress testing every two years instead of annually. The Fed would generally apply enhanced prudential standards to firms with $250 billion or more in assets while applying them to firms with $100 billion in assets when they exceed certain risk thresholds. Global firms with $700 billion or more in total assets — and those with cross-jurisdictional activity of $75 billion or more — would be subject to even more stringent prudential standards, and the nation’s eight global systemically important banks would remain subject to the most stringent supervisory standards.

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